Up and Down Wall Street, Part 2

O ne of the great stock-market runs we've ever had the pleasure to watch, man and boy, was the blazing seven-year sprint by the banks from the start of this amazing bull market until last year.

What made it all the more exciting was its astounding inclusiveness. Money-center banks, regionals, big ones, little ones and in-between ones, all joined in. And with virtually no pause for breath, they doubled and doubled again, multiples expanding apace with stock prices and the whole marvelous romp enlivened by burst after burst of mergers and acquisitions.

In 1998, as intimated, the parade began to turn a mite straggly. Some of the more grandiose merger combinations suffered evident digestive problems. The troubles in Asia took their toll, as did some of the less judicious lending to stock-market operators whose hot hands overnight turned ice cold. And of course, as the banks' stocks labored, the momentum gang picked up their marbles and took off for more promising plays, like the high-tech, online and drug sectors.

So far this year, the banks have been, to use the Street cliche, underperformers, and rather decidedly so. Thus, compared with the 13% rise in the Composite and nearly 15% gain in the tech-laced Nasdaq 100, the banks are down more than 2 1/2 %.

We don't want to ungild the lily too much here. We're not looking at 1990 all over again; the industry's finances are in good shape and, as our old pal Archie MacAllaster demonstrated at this year's Roundtable, the group still houses some awfully attractive stocks. It's just that the pickings have gotten a lot slimmer.

Charles Peabody, a maverick follower of the group at Mitchell Securities and someone we've quoted from time to time in this space, has been bearish on the banks for quite a spell now. Inevitably, he was early and missed a chunk of the move up. But more recently, he has been right on the money, and we thought of him when First Union's stock tanked after reporting disappointing results; Charles had been very negative on the shares.

BankAmerica
has also been prominent on Charles' sell list, and a couple of reports he put out last week, along with a brief phone conversation, make clear that he hasn't changed his mind.

The bank, the fruit of the union between NationsBank and the California behemoth whose name survived, is down considerably from its high above 88; it closed Friday a hair below 67. The powers-that-be gave an upbeat spiel at an investor conference late last week that apparently was pretty convincing, since the stock closed up two points Friday.

Charles observes that the shares, ostensibly anyway, are reasonably priced, at about 15 times his estimate for this year. He allows as how the first half might show favorable comparisons, thanks to writeoffs and the like -- what he calls "clean-up actions" -- taken in the last two quarters of '98. And he reports that institutions have started to accumulate the stock again.

But he still thinks it's an unequivocal "sell."

For openers, he wonders if BankAmerica isn't vulnerable to the SEC's drive to make the industry shape up its accounting practices. He singles out a special $500 million loan-loss provision in the third quarter that increased the bank's unallocated loan-loss reserve. Analysts have been counting on this reserve to absorb those inevitable unforeseen hits that arise. But, Charles comments, should the SEC force the bank to reverse the charge and revise third-quarter earnings upward, it'll mean that much less of a cushion with which to manage earnings this year.

He also feels resignations of top brass at the Montgomery Securities unit foreshadow reduced investment-banking revenues. His number, in fact, is 20% lower than management's. The difference amounts to about 15 cents a share.

Charles is also concerned about BankAmerica's stake in China/Hong Kong, where its exposure of $5 billion is the greatest of any U.S. bank. For he rates China/Hong Kong as a prime candidate for the next major credit dislocation.

Similarly, he cites as reason for caution BankAmerica's $13 billion direct exposure to Latin America. On that score, he reflects, a recession in Latin America would also have a significant and adverse indirect impact on the "gateway" states of Florida, Texas and California, where the bank "has an outsized portion of its franchise."

Further, he anticipates that the bank will disappoint the Street in how much it garners from its domestic interest-sensitive sources of income. In particular, he thinks securities gains and mortgage-banking revenues will fall shy of projections.

Finally, Charles reckons there's still a lot of risk in the D.E. Shaw portfolio that BankAmerica inherited and whose woes drew more than a little unfavorable notice last year. He thinks the more liquid positions in the portfolio have been sold, while the more "esoteric" positions remain.

His bottom line: Any rebound in the first half will peter out in the second.

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